Do Veterans Have to Pay Closing Costs?
Navigate the financial realities of VA homeownership. Gain clear insights into the costs beyond the loan, ensuring a smooth path to your new home.
The Department of Veterans Affairs (VA) home loan program offers veterans a unique pathway to homeownership, often requiring no down payment. As with any real estate transaction, veterans frequently ask about closing costs associated with this benefit.
Understanding Closing Costs
Closing costs are various fees and expenses buyers and sellers incur to finalize a real estate transaction and mortgage loan. These charges are collected by lenders, title companies, attorneys, and other third parties. Total costs typically range from 2% to 5% of the loan amount, though they can be higher depending on location and services.
Common closing costs include appraisal fees, credit report fees, title insurance, and recording fees paid to the local government. Attorney fees may also be included in some regions.
How VA Loans Address Closing Costs
The VA home loan program has specific regulations regarding which closing costs veterans are permitted to pay, differentiating it from conventional loan processes. The Department of Veterans Affairs generally prohibits veterans from paying certain fees, aiming to reduce the financial burden on those who have served. For instance, real estate agent commissions are explicitly excluded from being charged to the veteran, as are attorney fees in some specific circumstances.
Veterans are also prohibited from paying certain lender-specific fees, such as loan application fees or loan brokerage fees. The VA allows a lender to charge a flat 1% origination fee on the loan amount, which is intended to cover all lender-related costs. Alternatively, a lender can itemize and charge for specific allowable costs, but they cannot do both.
Despite these prohibitions, veterans are responsible for paying several allowable closing costs. These can include the VA appraisal fee, which ensures the property meets VA minimum property requirements, and the cost of a credit report. Other permissible expenses include survey fees, necessary title examination and title insurance premiums, and recording fees charged by local jurisdictions. Flood zone determination fees, which assess if a property is in a flood-prone area, are also typically paid by the veteran.
Seller concessions offer a flexible way to manage closing costs within the VA loan framework. A seller can contribute up to 4% of the loan amount in concessions to cover various expenses, including the VA funding fee, prepaid property taxes, and insurance premiums. These concessions are negotiated between the buyer and the seller and can significantly reduce the veteran’s out-of-pocket expenses at closing.
The VA Funding Fee
The VA funding fee is a distinct expense associated with VA loans, designed to reduce the program’s cost to U.S. taxpayers. This fee helps offset the VA loan program’s expense, which does not require mortgage insurance. It is typically a percentage of the loan amount and contributes to the program’s self-sufficiency.
The amount of the VA funding fee varies based on several factors, including whether it is the veteran’s first use of the VA loan benefit or a subsequent use, and the amount of any down payment. For first-time VA loan users with no down payment, the fee is generally 2.15% of the loan amount. For subsequent users with no down payment, this rate increases to 3.3%. A down payment can reduce the funding fee percentage.
Certain veterans are exempt from paying the VA funding fee. This includes veterans receiving VA compensation for a service-connected disability, as well as those who would be entitled to compensation but receive retirement pay instead. Purple Heart recipients are also exempt, along with surviving spouses of veterans who died in service or from a service-connected disability.
While an additional cost, the VA funding fee can typically be financed into the total loan amount, meaning it is not required as an upfront payment at closing. This allows veterans to avoid paying the fee out-of-pocket, though it increases the overall principal balance of the loan and the total interest paid over the loan term.